Good morning. I am Hans-Petter Mellerud, the CEO and founder of Zalaris. Joining me today for this webcast presentation of Zalaris Q3 2023 results is our CFO, Gunnar Manum. We are using Teams for this purpose and hope that you will find it informative and engaging. You can use the Q&A function to ask questions that we will answer at the end of the presentation. Please note that the presentation is being recorded. You can access the recording on the investor section of our website. Let's begin with the presentation. First, we will look at some of the highlights of the quarter. In Q3 2023, Zalaris delivered revenues of NOK 277 million, up from NOK 223 million in Q3 last year. This represents 24% year-on-year growth in NOK and 13% in constant currency.
Adjusted EBIT, ex Asia Pacific, ended at an all-time high of NOK 25.6 million, or 9.4% of revenue, up 125% from NOK 11.4 million in the same period last year. Zalaris has surpassed its growth aspirations for the year and will deliver around NOK 100 million above its initial NOK 1 billion revenue target. In fact, Zalaris has now delivered a major milestone of becoming a EUR 100 million run rate company and is well underway on its second milestone to become a NOK 100 million EBIT company. Zalaris' success in the market continued. We sold around NOK 20 million annual contract value of signings, delivering around 124% of our annual sales target, needed to continue to maintain the 10% growth rate in 2024 by the end of this quarter.
In addition, we have about NOK 10 million of additional other recurring revenue that also came in in the quarter. Zalaris' all-time high EBIT, combined with increased focus on capital allocation, enabled us to deliver NOK 25 million of operating cash flow in the quarter. As already mentioned, in the quarter, we continued our strong signing streak for the year and signed several new agreements with a total annual contract value of about NOK 20 million, and add to this the additional 10 that I mentioned previously. Both of Zalaris wins to serve the 4,500 employees of the German pharmaceutical and expansion to another country with our non-Nordic customer to deliver PeopleHub as a SaaS, serving 10,000 employees, are very attractive from a margin perspective, as both agreements fully can utilize existing system and organizational infrastructure, and thus produce higher than average incremental margins.
APAC continues its momentum and signed 18 agreements for a total of EUR 1.2 million total contract value, translating to more than EUR 500,000 annual contract value that is recurring revenue. With expectations on more to come in Q4, and thus rapidly closing the gap needed to become EBIT positive. Just after Q3 ended, Zalaris was awarded four new years with the German state of North Rhine-Westphalia in a public tender for an increased scope with improved pricing to support them managing their SAP payroll solutions, serving around 700,000 employees and pensioners. The contract shows Zalaris' stronghold in the German public sector and has an estimated annual contract value of well above EUR 2 million.
With these new signings, Zalaris has secured approximately 124% of our 2023 sales budget, needed to sustain 15% growth in Managed Services in the coming years, by the end of this quarter. This is considerably ahead of closed sales in the same quarter last year. In addition, Zalaris has increased its pipeline of multi-country PeopleHub new name and upsell opportunities to approximately NOK 810 million annual contract value, that is. This is 27% higher than at the end of Q3 last year. Feedback from the market is that we are far from the cheapest provider. Customers choose us due to our user-friendly, comprehensive solutions and flexibility to adapt to their business needs. When we lose, it's mainly about lack of coverage of certain geographies. We expect additional signings in Q4 that will improve the situation further. Then let us look at our segments.
Managed Services revenue increased by 24.5% as reported, and 15.3% in constant currency to NOK 200 million. In absolute terms, a slight decrease in reported, but a slight increase in constant currency compared to last quarter. This growth was driven by new contracts, upsell and volume increases, which accounted for 58% of the increase, as well as for new customers, which contributed to 42%. Our Net Revenue Retention in constant currency remains strong at 106% year-on-year, as existing customers expanded their geographic footprint and functionalities. All our regions achieved well above our target of 15% growth. DACH was the key absolute growth generator in the quarter, with 40% from a fairly high base. Managed Services represented 72% of our total revenue, slightly higher than last year....
Then let us look at Professional Services, our consulting practice. Professional Services revenue grew 19% and 4.1% in constant currency to NOK 73.1 million. Our Professional Services capability has been key to win our recent contracts and is increasingly also being used in Germany and U.K. to implement Managed Services contracts based on PeopleHub and our standardized template-based solutions. Most of the growth in this segment came from the U.K., which grew by a massive 87% compared to last year. Germany had revenue in line with last year, as consulting resources were increasingly used to implement Managed Services projects. This is strong performance, especially when considering that summer vacation, reducing the number of available working days during the quarter.
Again, let me remind you, in Professional Services, we see that Application Maintenance Services , or AMS, helping customers maintain their payroll and HR systems, mostly on long-term or subscription basis, continue generating around 59% of total revenue. Our long-term relationships with customers continue being visualized through 86% of our Q3 revenue in this segment, coming from customers that were also customers in Q3 last year. Our Right-shoring metric continued developing positively during the quarter, increasing the percentage of nearshore/offshore as percentage of total headcount with 1% since last quarter and around 6.5% year-on-year. This lowers our resource cost and is a significant step towards our Zalaris 4.0 target of 50%. We expect this trend to continue. Let me remind you again over what Zalaris has become.
Our business model, based on long-term agreements and recurring revenue, is favored by many investors. We have offered Software as a Service , Business Process as a Service , and outsourcing delivery models since we were founded 23 years ago. To reiterate, more than 90% of our revenue in Managed Services and around 50% of our revenue in professional is recurring based on long-term agreements. Our historic churn is low, in the 2%-3% range. Delivering payroll and HR services based on one common global IT platform, Zalaris PeopleHub, supported by local competent resources, has been key to our success and 23 years of growth. Now, a EUR 100 million run rate company, we are being seen as one of the leading global players in our industry.
From the outset, our goal was to help customers reduce their direct process cost by 20%-30% by outsourcing their payroll and HR processes to us. At the same time, we enabled them to operate seamlessly across borders. Our approximately 1,100 employees deliver services from 17 countries. In addition, we can deliver to 150+ countries through partners with our PeopleHub concept. Our short term aim is to deliver services with our own solutions and service centers for all European Economic Area and G20 countries. We see large companies across the globe prioritize investments towards solutions that enable unified access to payroll and HR data for analytical purposes, digitization of workflows, reduction of costs, and securing business continuity of business critical payroll. Everyone needs payroll if they are in business.
Working from anywhere has become the new normal, driving the need for fully digitized people processes. We, in Team Zalaris, are extremely well positioned with our innovative product and service portfolio that cover the whole payroll and HR value chain. Our services are built around our PeopleHub concept, enabling customers to manage their human capital across borders in one common cloud-based system solution, with functionality covering the full employee life cycle. The solution is offered as Software as a Service , with additional layers of Business Process as a Service and outsourcing, and can be integrated to all major global HR solutions. Our organization is structured in two business units. Managed Services deliver solutions and services based on PeopleHub, ranging from Software as a Service to comprehensive outsourcing solutions.
We can integrate to whatever global HR solution a customer has, including SAP SuccessFactors, Workday, Oracle, Cornerstone, CatalystOne , and others. Professional Services is an SAP partner focused on advisory and implementation services of the SAP Human Capital Management Solutions as SAP SuccessFactors and S/4HANA product portfolio. Professional Services is also responsible for implementing new Managed Services customers. Managed Services accounted for 72% of our revenue in Q3. Professional Services produces the corresponding 28%. Again, this is a slide that reminds me of what a fantastic customer base we have. Typically, mid-sized and larger companies with more than 1,000 employees and operating in two or more countries. We have a diverse portfolio of customers in most industry segments, some of the leading brands in the regions where we operate.
Many of these with a significant upside in supporting them in continuing digitizing their people processes, simplify work life, and achieve more... So with this, I hand over to our CFO, Gunnar Manum, who will take you through the financial part of the presentation.
Thank you, Hans-Petter. The revenue for the third quarter was NOK 277 million, it was an increase of 24% year-on-year, and an increase of 13% when measured in constant currency. In the third quarter, approximately 81% of total revenue was invoiced in currencies other than NOK. Compared to the second quarter, revenue for the quarter was marginally higher in constant currency. Revenue Managed Services increased by 15%, while Professional Services had an increase of 4% in constant currency. As noted this, in previous quarters, significant Professional Services resources, particularly in Germany, are still being utilized on the implementation of new customers and change orders within Managed Services, thus reducing the external revenue generating capacity within that division.
As mentioned by Hans-Petter, approximately 58% of the reported revenue increase in Managed Services come from customers that were customers in Q3 last year, and 42% of the growth came from new names. New contracts signed in Managed Services during the quarter has annual recurring revenue of approximately NOK 20 million. In addition to the new signings in Q3, we have revenue that will come from contracts signed in earlier periods, but not implemented as of Q3. This slide shows the total future revenue impact of these new contracts. The total net annual recurring revenue from these contracts is NOK 99 million, which represents a further increase in annual revenue for Managed Services of 10% when compared to the revenue from the last 12 months.
In the top graph, we show the latest current annual recurring revenue for Managed Services of NOK 709 million, based on the annualized revenue figures for the third quarter. This figure, this figure is marginally lower than the estimated estimate presented in Q2 report due to negative currency movements. On top of that, we have NOK 99 million in additional net annual revenue from signed contracts that will be, will be implemented. Thus, the contracted annual recurring revenue going forward is NOK 808 million. The timing for the for the additional Net Revenue of NOK 99 million in annual revenue is shown in the bottom graph.
On top of the existing recurring revenue of NOK 808 million within Managed Services, we normally have change orders of approximately 10%, that is NOK 81 million, and revenue from Professional Services and APAC of NOK 292 million, based on the P&L figures for the last 12 months. This gives an estimated future annual revenue for Zalaris of approximately NOK 1.2 billion, based on signed long-term Managed Services contracts and calculated using the average exchange rates for the third quarter. This represents an increase of approximately 10% compared to the total revenue for the last four months. The Adjusted EBIT, excluding APAC for the third quarter, was NOK 25.6 million, an increase of 125% year-on-year. The APAC region had a negative EBIT of NOK 2 million.
The Adjusted EBIT margin, excluding APAC, was 9.4%, up from 5.2% last year. The EBIT for Managed Services was NOK 28.7 million, which was NOK 4 million higher than last year, and the EBIT margin increased by 4.1 percentage points to 14.4%. Margins have increased mainly through lower marginal costs and the positive impact of operational improvements, particularly in the Northern Europe region. The EBIT for Professional Services was NOK 6.6 million, an increase of NOK 2.8 million compared to last year, mainly due to an increased contribution from U.K. Moving on to some of the other key P&L items. With increased revenue and ongoing transformation project for new customers, the number of FTEs has increased by 89 year-on-year.
This, together with a negative currency impact from having more than 80% of our personnel costs denominated in currencies other than NOK, largely explains the increase in personnel expenses. A majority of the new FTEs has come from nearshore and offshore locations. The revenue per FTE increased by approximately 4% compared to last year. Other operating expenses were also negatively impacted by currency movements, as well as an increased number of externals, but marginally lower than as a percentage of revenue and the use of external payroll partners for new global payroll contracts. The EBIT was NOK 17.6 million for the quarter, compared to NOK 4.4 million last year.
Net financial income were at 1.1 million , which include an unrealized currency gain of approximately NOK 30 million relating to the euro-denominated bond loan. We continue to have a strong cash position with a cash balance at 30 September of NOK 121 million. The operating cash flow before interest was approximately NOK 25 million, which included an increase in net working capital of approximately NOK 10 million relating to trade receivables. We made investments, mainly invest in system development of NOK 4.1 million. The net interest-bearing debt as of 30 June was NOK 333 million, down from NOK 356 million at the end of the previous quarter. Now, that concludes the financial section, and I will now leave the word to Hans-Petter to give you some perspective on our markets and outlook.
Thank you, Gunnar. To sum up, let's look at Zalaris' outlook for the next 36 months and sum up. As you probably know, Zalaris had its Capital Markets Day in September, and I would like to repeat some of the message in terms of our financial targets for the next 36 months. For those of you that did not attend the Capital Markets Day, you will find all of the presentations and recording on our IR pages. We believe we can sustain continued high growth going forward. Over the last two years, our annual growth rate has been approximately 18%. When removing the impact of currency changes, the annual growth rate has been approximately 14%. The growth comes mainly from increased revenue from existing customers within Managed Services and from recurring revenue from long-term contracts with new customers.
These contracts typically have an initial duration of five to seven years. Going forward, we have set an annual growth target of 10%, with a target total revenue of NOK 1.5 billion by 2026. The growth target for Managed Services and Professional Services is 15% and 5%, respectively. As a result, recurring revenue from long-term contracts with customers in Managed Services will represent an increasing share of total revenue, moving from 68% in 2021 to a targeted 77% in 2026. For 2023, we expect revenue of close to NOK 1.1 billion. Additionally, we have approximately NOK 100 million net of churn in annual recurring revenue already contracted for future periods. Hence, we believe the revenue target to be well within reach in that time period.
On a regional level, the highest growth is expected to come from the DACH region, as the total addressable market in DACH is approximately four times that of the Nordic market. We are also strengthening our U.K. sales capacity and aim to repeat our success in Germany there. Add to this, our positive development in APAC, that is expected to deliver an annualized revenue of NOK 30 million by the end of this year. We will have increased focus on growing operating cash conversion. The target is for an operating cash flow conversion before interest payments of 65%-70%. This will be achieved through working capital improvements, particularly in trade receivables, and by ensuring that transformation projects for new customers are minimum cash neutral during the implementation stage, which has not always been the case in the past.
Based on our target EBIT of NOK 180 million in 2026, that should give an operating cash flow before interest of approximately NOK 190 million. To sum up, in this quarter, we are pleased to see that our long-term focus on value creation is materializing. Zalaris People Hub is increasingly favored by mid-market and large customers seeking to digitalize their payroll and HR processes, resulting in 24% reported growth in the quarter. We are now a EUR 100 million annualized revenue company and expect to continue delivering above our 10% growth target over the next 36 months. Zalaris People Hub is a scalable solution supporting our Zalaris 4.0 industrialized approach that is starting to show with an all-time high Adjusted EBIT in the quarter.
We are on track delivering on our 10% EBIT target and next milestone of becoming a NOK 100 million EBIT company. We are now aiming higher and are targeting 12%-15% EBIT over the next 36 months. Increased focus on capital allocation is starting to show effect in Q3, with NOK 25 million in operating cash flow. In combination with the increased profitability, this will drive free cash flow toward our target level of 70% of EBITDA. Delivering on these targets will bring us more in line with our peers, and we expect the valuation of our efforts to be shown correspondingly. So thank you for joining us today, and it's now time for questions.
Yes, we have a few questions starting with a question around APAC. Could you give some more color on APAC, and how does APAC look in 2024, given the current customer base and contract backlog?
Yeah, so as mentioned, we have had a very positive development in APAC during Q3. I would say more or less according to plan, closing 18 new deals, smaller and larger. Many of them with recurring revenue components, implementing a cloud-based, PeopleHub-based payroll solutions. That will also, of course, be recurring revenue also in 2024. And as it currently looks, the target is to deliver an EBIT neutral to positive Q4 for APAC. And we, of course, assume and expect that to continue also into 2024.
Next question. How has the pipeline or the momentum developed in H2 versus H1? Are you seeing positive effects from the refer-- macro picture?
I would say so far it's, I would say it's pretty much the same as in the first half year. We see we have a number of interesting opportunities that we are working on, and a number of opportunities that we are in the, say, signing, contracting stage.
Next question. You're now providing some net retention rates. Now, do you have any historical information on the net retention last 10 years?
No, we unfortunately do not. But, I think the current rates are reflecting, it's probably better than what we historically have had. As we, over the last years, have seen a very positive effect of the more focused account-based approach that we have to customers from adding, selling more additional services, and also in particular, expanding our geographic footprint. And we expect that to continue, because there are lots of additional upsell opportunities to help customers manage their workforce better, and doing that all in one integrated solution.
If it's one trend that we also see with a tougher macro picture, is that also analysts estimate more a consolidation of solutions into more platforms, and we are definitely one of those platforms that you can consolidate functionality to, that will reduce cost and simplify operations for customers.
Thank you, Hans-Petter, and that concludes the Q&A section.
Okay. Thanks a lot for watching. If you have questions, as in the past, feel free to also forward them to ir@zalaris.com, and we will do our utmost to respond to them. So thank you. Have a nice day.